威爾豪瑟 (WY) 2008 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Weyerhaeuser 2008 second quarter earnings conference call. During today's presentation, all parties will be in a listen-only mode. (OPERATOR INSTRUCTIONS) This conference is being recorded Tuesday, August 5th, 2008.

I would now like the turn the conference over to Kathryn McAuley, Vice President of Investor Relations. Please go ahead, ma'am.

Thank you. Welcome to Weyerhaeuser's second quarter 2008 earnings conference call. I am Kathryn McAuley, Vice President of Investor Relations.

Joining me today are Dan Fulton, President and CEO; Patty Bedient, Executive Vice President and Chief Financial Officer; Tom Gideon, Executive Vice President, Forest Products; and Larry Burrows, President, Weyerhaeuser Real Estate Company.

This call is being webcast at www.weyerhaeuser.com. The earnings release and material for this call can be found at the website or by contacting April Meyer at (253) 924-2937.

Please review the warning statements in our press release and on the presentation slide concerning the risks associated with forward-looking statements. Forward-looking statements will be made during this conference call.

This morning, Weyerhaeuser reported a second quarter 2008 net loss of $96 million or $0.45 per diluted share on net sales of $3.6 billion. The second quarter included the following after-tax items. A charge for impairments and reserves related to real estate assets of $206 million or $0.98 per diluted share. A gain for book purposes on the ownership restructuring of Uruguay assets of an estimated $101 million or $0.48 per diluted share. A gain related to charges in post - to changes, excuse me, in post-retirement benefits of $32 million or $0.15 per diluted share. A charge for restructuring, primarily corporate staff, of $24 million or $0.11 per diluted share. A charge for closures and asset impairments, primarily in wood products, of $20 million or $0.09 per diluted share. A gain of $14 million or $0.07 per diluted share for the reversal of tax accruals, due to lack of statutes of limitation. Excluding these items, the Company had a net income of $7 million or $0.03 per diluted share. A GAAP reconciliation of special items is available on our website in the earnings information package.

Please turn to Chart 4 in the earnings information package, as we will next discuss the waterfall chart. Chart 4 is a bar chart detailing the changes in earnings per share on a segment basis from first quarter 2008 to second quarter 2008. As noted in the first bar on Chart 4, Q1 '08 the Company lost $0.24 per share.

Quarter-to-quarter changes in corporate earnings were as follows, and we are going to proceed left to right across the waterfall chart. We begin with the Timberlands segment. Higher costs, slightly lower prices and fewer non-strategic land sales more than offset higher volumes, lowering Timberlands earnings by $0.02 per share. Higher wood products prices, lower costs and volume improvements resulted in a $0.21 per share contribution to earnings from wood products.

Cellulose fibers earnings were lower by $0.04 per share. Price increases were more than offset by higher manufacturing costs, due to scheduled maintenance at three mills and higher raw material costs. Containerboard Packaging and Recycling earnings were $0.03 per share higher. [Notch]expensing depreciation contributed $0.18 per share. Higher prices contributed $0.13 per share, and volumes were favorable. Partially offsetting these positives was the impact of the Iowa flood and higher manufacturing costs. Price declines resulted in real estate earnings $0.01 per share lower than in Q1. Last, corporate and other were $0.10 per share higher, due to foreign exchange gains and lower variable comp.

The final bar to the right of the page is the second quarter 2008 gain before special items of $0.03 per share.

I will now turn the call over to Dan Fulton. Dan?

Thanks, Kathy.

Today's results clearly demonstrate the challenges presented by the current conditions in the housing market. The effect of this slowdown is deep, and touches virtually every business in our portfolio. In response, we are addressing our near-term challenges. We have taken aggressive steps that today's market conditions demand and, if necessary, we are prepared to take additional actions. But we are also looking to the future and the opportunities ahead. Our future is build on world-class Timberlands and valuable land holdings. We are committed to maximizing the value of these assets by applying industry-leading silviculture practices, investing in the potential of biofuels through our joint venture with Chevron, and extracting values from the extensive mineral rights we hold. To this we add supporting businesses, unique research capabilities and real estate business focused on serving housing markets with some of the highest potential in the country.

Over the past several years, we have adjusted our business to enhance our focus on our timber and land holdings. In the process, we have simplified the portfolio and cut costs. These actions have strengthened our balance sheet and positioned us to choose the most efficient corporate structure and business portfolio to maximum shareholder return. Just yesterday, we finished a significant step in that process by completing the sale of our Containerboard Packaging and Recycling business to International Paper. In the process, International Paper adds outstanding assets and approximately 14,000 dedicated employees to its containerboard packaging business. We thank these employees for their contributions to Weyerhaeuser, and we know that they can contribute to the success of International Paper.

Today, our businesses are leaner and we continue to trim overhead costs. In addition, we have started restructuring our corporate support staff to meet the needs of a more tightly-focused company. Over the next 18 months, we will complete the elimination of approximately 1,500 corporate-level positions and achieve ongoing savings of $375 million per year. As we move forward, we will continue to pursue other opportunities to streamline the organization. This is an aggressive program that will achieve approximately 50% of the ultimate savings by year end, and the full amount when we phase out support agreements associated with the Dontar and the International Paper transactions.

Additionally, we have revised some of our benefits to improve the competitiveness of our businesses, while maintaining our attractiveness as an employer. We emerge from this process a leaner and more focused company. We, however, will not lose site of what has made this company great. We remain dedicated to creating a safe work environment and to growing and harvesting trees in a sustainable manner. We will be good stewards of the environment, and play an integral role in the communities in which we operate. We will maintain a diverse work force, and empower our employees to help us serve our markets, our customers and our communities.

In addition, we will have operational excellence in our businesses. This is why I have appointed Tom Gideon as Executive Vice President, Forest Products. Many of you you have met Tom in his previous roles as our Senior Vice President of either Timberlands or Containerboard Packaging and Recycling. What you may not know is that he has also spent extensive time in the wood products business, in addition to holding positions in human resources and sales. As he just demonstrated with the steady improvement that our Containerboard, Packaging and Recycling business achieved under his leadership, Tom gets results. In his new role, Tom will work closely with the talented leaders in our Timberlands, wood products and cellulose fibers businesses to further enhance our operational excellence.

To describe the second quarter performance of these businesses, and the steps that we are taking to meet market conditions, I'd like to turn the call over to Tom.

Thank you, Dan.

As you mentioned, we continue to face challenging market conditions. But before I get to our operational results, I'd like to start on a positive note by recognizing our excellent safety performance. We have continued to achieve a recordable incident rate of less than 1. As we have mentioned in the past, there's a strong correlation between improved safety performance and operational excellence. Safer operations reduce costs, enhance productivity and improve quality. Other the past quarter our employees have faced enormous challenges, ranging from the divestiture of a major business to extremely trying markets. It is a credit to our employees and their continued focus on safety that we were able to maintain an excellent safety performance and achieve production records, despite these distractions. I know that our people will remain vigilant in the quarter ahead, and that their concerted focus will help us operate safely and at our best during these tough markets.

Since land and timber are our foundation, I will start by reviewing our performance in Timberlands, a business that continues to perform well given the market conditions. For those following the slides in the Investor Section of the website, this is Chart 5. As expected, we are feeling the effects of the continued softness of the California housing market, which resulted in slightly lower prices in the West. In addition, we are closely monitoring our harvest levels to keep them in line with demand. I should point out however that our harvest levels in the West actually increased during the quarter, as we continued to salvage trees damaged by the December storms in Washington and Oregon. Due to concerns about the degradation of the wood on the ground, we are quickly salvaging as much of this blowdown as possible. Most of this salvaged timber is white wood, such as [Hemlock], and we have been able to ship increased volumes into our Korean markets. We are still maintaining our historic export premium, and the outlook for our export market remains strong, especially since the Russians raised their log export tax to 25% in April, which will make our logs more competitive in Korea and China.

In the South, the story mainly involves fuel, where higher prices have increased our transportation and harvesting. But higher fuel costs have increased interest in domestic drilling. As a result, we have continued to see a strong contribution from our minerals group.

Move to go wood products, I will direct your attention to Charts 6 and 7. The positive news is that we have experienced modest price improvements in lumber and OSB. Demand, however, continues to be a concern. The single family housing start rate is now at 670,000 or nearly 56% below 2006 levels. As Dan noted in his comments, Weyerhaeuser has taken aggressive steps to adjust our production to match the reduced demand. Compared with 2006 capacity levels, we have reduced oriented strand board production by 48% and lumber by 30%. Our engineered product lines are operating at less than 50% of their 2006 capacity, even though we saw a slight improvement in demand during the second quarter. We believe these steps have been an appropriate response to the weak market conditions. While we can't control market forces, we will continue to focus on the things we can control, improving our sales penetration and operating efficiencies.

Meanwhile, turning to Chart 8, our cellulose fibers business continues to perform well and benefits from the weak US dollar. While we benefited from improved realizations, we also experienced higher transportation, fuel, fiber, and energy costs during the quarter. In addition, with more goods being shipped from the US than in the past, it is becoming increasingly difficult to secure shipping containers. During the quarter, we experienced a delay in shipping of approximately 15,000 tons of pulp in June, which negatively affected the earnings from this business. In addition, scheduled mill outages reduced our production by 37,000 tons.

The long-term outlook for cellulose fibers remains extremely strong, and in addition to having some of the industry's most efficient mills, we continue to look for ways to leverage our focus on absorbent pulps. Earlier this month, we took a significant step in that direction by agreeing to collaborate with Lenzing, the world's market leader in cellulose staple fibers, to explore development of novel lyocell-based nonwoven fabrics. The objective of the collaboration is to develop a technology for the large-scale industrial production of an innovative and sustainable cellulose-based material for industrial and personal care applications. The technology will provide an alternative to more expensive petroleum-based materials and nonwoven products, with raw materials based on renewable wood fiber.

Turning to Charts 9 and 10, I will conclude my remarks today with a discussion of our Containerboard Packaging and Recycling business. It has been my privilege to work through this team through our strategic review, and ultimately the sale and transition of the business to International Paper. Throughout this process, the team has worked together to represent the best of Weyerhaeuser, and to demonstrate the potential of this business. Over the past 15 months this business has worked safely, improved our operating margins, implemented price increases, brought in new business, and achieved all of our cost-reduction targets. I couldn't be prouder of this team, and I know it will be a great addition to International Paper. Although results of this business's final quarter with Weyerhaeuser were hurt by the flood in Iowa that affected our Cedar River containerboard mill and our Cedar Rapids box plants, we improved packaging realizations by 4.1% compared with first quarter, and we managed our accounts to be in line with planned volume expectations.

In closing, while I need to acknowledge the challenges we are facing, I am also very optimistic about the future of our forest products businesses. Through our recent divestitures, we have created a more focused and closely-aligned set of assets. Our mission is to present options to Weyerhaeuser, its shareholders and employees by improving the overall value of our portfolio, by operating safely and improving operating performance to justify continued investment. Short term, this will require us to manage effectively through the down cycle, and position our businesses to succeed in the up cycle. Longer term, we are focused on insuring we are leaders in each respective business segment, and that we establish viable platforms for future growth. We have the assets and the people to achieve both our short-term and long-term objectives. It is our commitment to you that we will operate these businesses to achieve maximum shareholder value.

I will now turn the call over to Larry Burrows, who will discuss our real estate business.

Thank you, Tom. Good morning.

For your reference, WRECO highlights are included in the Investor Section of our website on Chart 11. The housing market remains exceptionally difficult. The traditionally strong second quarter spring selling season never materialized. Reduced demand and lower consumer confidence has led to increasing excess inventory of new and existing homes, which now approaches 11 months. New home prices remain under pressure as builders compete for a more limited supply of customers. Existing homes have also experienced significant declines, with the Case-Schiller 20-city composite index declining 16% year-over-year. More stringent mortgage underwriting has similarly constrained demand, particularly at the lower price points. Throughout this challenging environment, our operating response remains the same. Specifically, we continue to decrease unsold inventory, reduce land acquisition and land development spending, adjust staffing, and substitute smaller, less expensive products. Examining conditions across our markets, there are few bright spots.

San Diego and Houston have held up better, although at reduced sales cases. Puget Sound has significantly slowed. The Washington DC area is approaching the 3rd anniversary of the housing downturn, with little evidence of improvement. Las Vegas, Phoenix and the Inland Empire region of California remain our most challenged markets, and are hampered by accelerating foreclosure activity. Reduced sales have decreased our single family homes sold but not closed, what we call our backlog, to just under four months of sales.

Last month, we warned about significant impairments. As an operating discipline, we routinely re-evaluate our land pipeline to gauge project profitability. In the past, our higher margins have helped can cushion the valuation impact of slower sales and reduced pricing. As sales paced and priced continue to deteriorate, in many of your communities that cushion is gone. This is the basis for the impairment charges recognized in the quarter, which were $311 million for homebuilding assets and real estate investments.

In addition, $23 million of capitalized interest was impaired in the corporate segment. The majority of our impairments were taken in our homebuilding operations covering California, Nevada, and Maryland, and at WRI, our real estate investment company. Excess supply, weary buyers and continued credit market tightness make the outlook for housing for the balance of the year exceptionally difficult. Our local managers are experienced and have operated in such a challenged environment before. We are with well equipped to successfully manage through the near term, and benefit as the markets stabilize and transition to recovery.

I will now turn call over to Patty to discuss the outlook for the third quarter.

Thanks, Larry. Good morning, everybody.

I'll start by comments about the third quarter outlook with a discussion of Timberlands. We expect [sea] log volumes to decrease seasonally in both the West and the South. Domestic pricing is also likely to decrease somewhat, while the export market in the West is holding up well. We expect costs to increase, due to seasonally higher cultural spending and higher logging cost, primarily as a result of higher fuel expense. Increased earnings from oil and gas revenue, and a higher level of income from non-strategic Timberland sales, are expected to offset these negative factors and result in overall segment income slightly higher in the third quarter compared to the second.

Challenging market conditions for wood products will persist through the quarter. Average sales realizations will be mixed but overall should have a small positive impact compared to the second quarter, primarily in engineered wood products and OSB. Shipment volumes across product lines will likely decrease; however, we don't see a significant earnings impact from the reduced volume. Manufacturing costs, including raw material costs, are expected to be favorable compared to the second quarter. For this segment, we expect operating losses for third quarter to be just slightly less compared to the second quarter.

Larry has already described the market conditions we face in our real estate segment. Congress has taken some action, with the passage of the housing bill at the end of last month. However, it is unlikely to result in any meaningful improvement for this quarter. We expect single family margins will continue to be under pressure from the overhang of inventory and ongoing discounting, which continues to characterize the competitive response to these difficult conditions. However, we do expect some modest improvement in margins resulting from a more favorable mix in the third quarter. Closing volumes will likely decrease in the third quarter. Excluding the effect of impairment, we expect the third quarter loss in our single family real estate operations to be comparable to that of the second quarter.

In cellulose fibers, we expect that market conditions will continue to be favorable. Average sales realizations are anticipated to increase in the third quarter over the second. In addition, we have fewer scheduled annual maintenance outages, as we have completed four of six mills as of the end of the second quarter. This should dramatically improve our operating results through lower manufacturing costs, as a result of higher productivity and reduced maintenance costs. These positive results will be partially offset by increased chemical costs. We expect significantly higher earnings in the cellulose fiber in the third quarter compared to the second.

As is already been discussed we closed on the sale of our Containerboard Packaging and Recycling assets yesterday. As a result, the earnings in this segment in the third quarter will only include one month of operations. The sale price was $6 billion, to be adjusted for post-closing adjustments including final working capital and closing costs. We expect to record an after-tax gain of over $200 million. The after-tax proceeds are anticipated to be between 4 billion and $4.5 billion.

As we have previously stated, we will use a substantial portion of the proceeds to reduce stats, with the remainder to support further restructuring as well as growth opportunities. While we will have a significant tax bill to pay in December, we will be investing the proceeds in the meantime, which will result in additional interest income.

As Dan mentioned earlier, we continue to execute our program to sale other nonstrategic assets. In July, for example, we closed on the sale of our Australian assets, which resulted in cash proceeds of over $300 million. Through the first six months of the year, Weyerhaeuser Company has spent $234 million for capital expenditures. Spending for the full year is anticipated to be between $400 million and $450 million.

Finally, let me comment on one of the special items discussed in our earnings release. During the second quarter we made some changes in our benefit plan, primarily retiring medical benefits. These changed resulted in a remeasurement of the unfunded liability as of the end of the quarter. We have included a more extensive explanation in our 10-Q which we will be filing later this week, but essentially these changes resulted in a reduction of our liability by approximately $365 million which, on an after-tax basis, increased our shareholders' equity by approximately $200 million, most of which will be reflected as an increase to other comprehensive income on our quarter end balance sheet.

Now I'll turn the call back to Dan for some final comments before we begin our Q&A. Dan?

Thanks, Patty.

There's no doubt that we are operating in a tough economic environment. As we manage through these conditions, we are also taking actions to achieve our goal of delivering maximum shareholder returns. Every step we have taken over the past two years has been consistent with that objective. Last year, this involved our transaction with Dontar.

We followed that earlier this year with the passage of the Tree Act, which will reduce our tax burden, and then just yesterday as we reported, we completed the Containerboard transaction, which allows us to pay down debt and provides us with improved financial flexibility. We continue to divest nonstrategic assets, allowing us to generate cash and tighten our focus. We have already begun the process to right-size our support functions to make our businesses more competitive.

Finally, we will continue to drive improvements in our businesses under the operational leadership of Tom Gideon and Larry Burrows. All of this puts us in the best possible position to choose the right structure for the right reasons at the right time.

Now I'd like to open the lines to your questions.

Eric, would you please open the line to questions?

Absolutely. (OPERATOR INSTRUCTIONS). Our first question comes from George Staphos with Banc of America Securities. Please go ahead.

Good morning. If we look at cellulose fibers for a minute, given your outlook and given the favorable trends we've seen in that business, what offsetting or compensating changes might you be seeing as well from the competitive landscape, or perhaps not? Do you expect competition to increase in that business over time, why or why not? I have a follow-on. Thanks guys.

Thanks, George.

This is Tom. That's a business that we continue to perform very well in. We do excellent in terms of our fundamental manufacturing, and we participate extremely well in the markets fluff pulp arena, which we think is an added advantage for us. In addition, as we talked about with our announcement about [Linden], we continue to look into new innovative ways where we can get into specialty fiber markets that have higher margins.

So I can't comment on exactly everything that may be done in a competitive environment, but our focus is to continue to manufacture well, to move into the areas that we have good market presence and to expand our specialty fiber opportunity.

if you think about it as a gap related to time or duration, you know, what kind of gap do you think you have relative to your peers, relative to the technology and science you have in fibers, which give you an advantage in the market? Is it you know, six months, is it five years? Could you give us a flavor. Obviously, this is not an audited figure.

(Laughter)

I will give you an unaudited number. it is really hard to determine that, but we have a long history of excellence in our research and development components of our business. We have been innovative in our businesses and again, going back to the Lenzing example, which is a joint development agreement, we are looking to move quickly. We think we are certainly at the forefront of innovation in our industry, and I can't give you an exact number but we think we are doing extremely well in this arena.

All right. Last question and I will turn it over. Dan or Larry, what factors or timing would we expect to see for WRECO to get back to break even levels. Any short thoughts on that? Thanks. Good luck on the quarter.

Thanks, George. I will let Larry address that.

This is Larry, George. I think what we would like to be able to see some firming in the marketplace, where customers have confidence that the home that they buy today, that the value will be there, that they will also be in a position to be able to either sell their existing home if they have one or they're able to go out in the marketplace and get attractive financing. Also, I think we would be looking for some of the higher levels of inventory, both in the existing home market and new home market to clear a little bit. So I think those are some of the - kind of the fundamentals that we would like to see improved that would allow us to, on an operational basis, get back to generating some earnings.

All right. I will turn it over. Thanks.

Thanks, George.

Our next question comes from Gail Glazerman of UBS. Please go ahead.

Hi. Maybe following up on that last question, can you share any of your views on when you might see that firming in the housing market? Kind of what your forecasts are for housing starts in '09 and 2010?

Gail, this is Larry. I'm not sure our crystal ball is better than anybody else's. I think what we have said is we expect the market for at least certainly the balance of this year to be challenging. I think that what we will be looking for is to - you know, some of this inventory which is running out to 11 months needs to clear the marketplace, and our customers need to begin to have some confidence to be able weigh back into the market. They're being rewarded for not being urgent right now. The longer they wait it is, you know, to their benefit, and those are the kind of conditions that need to change which you know, probably will take us you know, well into next year before we see any improvement.

Okay. And changing gears, there have been a couple of comments about mineral rights, mineral income, and can you just give a little color on what you are seeing and what opportunities you have, maybe kind of on your 6 million acres of land, and how many many mineral rights you still retain and what type of changes there have been this year?

Thanks, Gail. Just a little bit of color. Historically, we've had a practice of retaining mineral rights even when we sell land, so we have currently mineral rights covering about 6.4 million acres across the country. This has been an active business for us for some period of time. So we have an active minerals group that operates within our Timberlands organization. Their typical practice has been to generally lease those mineral rights in return for, you know, fee income from the leases plus, in some cases, royalties. In some cases, we actually participate with the party that may be leasing the property. There has been a lot of activity recently, publicized in Louisiana in particular, where we have some holdings, and on the Louisiana question, let me just turn that over the Tom to give you a little bit of local flavor for what's happening down there.

Gail, just to give you a little background, in the greater - what we call the Hanesville Shale play there, we have approximately 115,000 acres in which we have mineral rights. We acquired these rights as a result of the Willamette transaction in 2002. Our mineral rights are positioned throughout the greater plain, and we have a relatively small but I would say attractive footprint in the DeSoto Parish, which is really the very core of that play at this point in time. As Dan mentioned, for a portion of those acres we have entered into short-term leases, with very significant up front bonus rates and excellent royalty participation that will allow us to share significantly in any ongoing revenue streams that come from that. And we are actively looking and considering all of the options in that area that will allow us to best monetize the value we have in our mineral holdings.

Gail, depending upon the location of our properties, you know, the mineral rights traditionally might have represented gravel, but in some cases it would include possible oil and gas activity, coal, and in some cases hard rock minerals, and then in certain locations where we operate or have operated in the past, we have got some resources that may provide some potential. We view the mineral rights as a significant long-term asset of the company, and we actively manage it.

Okay. That's very helpful. Thank you.

Next question.

Our next question comes from Peter Ruschmeier with Lehman Brothers. Please go ahead.

Thanks. Good morning. Curious, following up on the mineral rights question, if you can help us to understand on a trailing 12-month basis what kind of income we have seen there and you know, what kind of trajectory you are seeing, and I guess related to that would you consider, Dan, perhaps breaking out that segment as a separate line item?

Well, that's a good question. We manage this process and we have reported on mineral income, and I think it would el be helpful for us to provide some greater visibility to that, so we can do so. In terms of past six to 12 months, Patty could you address that question?

Why don't I take that on, Dan? Particularly, over the course of the year, we have generated approximately $22 million in earnings from our minerals segment with a cash flow of about $48 million. A significant portion of that is due to the activity we have seen in our Louisiana properties and, you know, I guess I would say at this point in time we are very comfortable with the valuations we have received so far. As I mentioned earlier we continue to actively look and explore and consider all of the options we can to maximize that return.

That's helpful. And the website I think - your website is also very helpful in terms of detail you provide there. Can you remind us, when did you post that increased detail on your website? On mineral rights?

It was in the last -- within the last few months. I don't have an exact date, Pete.

Okay. That's helpful. And then to follow-up. A question for Patty, if I could. Now that the Containerboard sale is closed, is it possible to narrow down the net proceeds in the $4 billion to $4.5 billion to a little finer point here?

Well, as I have mentioned, Pete, we just closed it yesterday and it is subject to the final working capital numbers, which will be coming out of the month-end close. So we expect that here shortly we will be able to do that. There are working capital, there's construction and process issues and closing costs. So I wouldn't want to put a finer point on it at this point but we will shortly.

Just last question, if I could, you have indicated a substantial portion of the proceeds to reduce debt. Is it possible to refine that a little bit, maybe in terms of a percentage of the proceeds?

Well, if you think about the proceeds, you know, you start with the $6 billion and you take off the final closing adjustments, we have short-term debt of roughly $1 billion, maturities in '08 of about $400 million, '09 maturities are about another $600 million, so we'll be looking at those. As you think about the tax payments that we will be making in December, you know, that will be in the neighborhood of $1.5 billion. And then you get to the other debt that's outstanding, and what debt we will repurchase and when we would, would really be determined by its immediate cost and its relative value vis-a-vis the other alternatives that we have for use of funds. So it is something that we are discussing with the Board on an ongoing basis.

That's helpful. Thanks very much.

Yes.

Next question.

Our next question comes from Chip Dillon with Citigroup. Please go ahead.

James Armstrong calling for Chip. What proportion of the third quarter Timberland income will be from land sales and what's normal?

I think we are estimating that we will have approximately $20 million of land sales income during the third quarter, and it varies depending on what the opportunity is as we try to match, you know, through our 1031 exchanges, but on an ongoing basis we have averaged over the course of the year between $80 million and $100 million in that segment.

Okay. How much of that is - how much of the total income number would that represent on average, historically?

I'm not sure I have that off the top of my head because it varies depending on all of the other components of income. But it has been in that realm. We would have to go back and take a look at what our net was over the last couple of years. Certainly in the magnitude of 10 to 15%, maybe slightly higher depending on the quarter.

Okay. Second question is, what is the tax rate going forward, given both next quarter and next year following the timber tax bill? Can you give us some guidance on that?

Sure. As you think about it, our income from continuing operations on a normal basis will - for the rest of this year, we would look at about 37-ish. We will also get in addition to that a benefit from the timber tax bill for the rest of '08 in the neighborhood of $50 million to $60 million. And I don't have a number for you for '09.

Okay. I appreciate it. Thank you very much.

Yes.

Next question.

Our next question comes from Mark Wilde with Deutsche Bank. Please go ahead.

Good morning. I have just a couple of questions about Timberland and then a follow-on. One question on the Timberland, Dan you mentioned these Russian duties and how this would create more opportunities to improve your position in China and Korea. I am just trying to figure out how big of a portion of your export log business China and Korea really represent now and could represent? I have always been under the impression that most of your value was driven by the Japanese market with the Douglas fir?

Well, you are absolutely correct, Mark. Most of the export volume historically has been Japanese - going to Japan, and we have over the past, you know, had some shipments to China and Korea. Recently, the activity has picked up quite a bit, as Tom talked about, because of the fact that we found this market for our blown-timber from the storms from last fall. Tom, could you address the pick up in volume that we have seen in China and Korea?

Sure. Mark, in years past we have historically had a significant presence in China. It has been minimal, I would say over the last decade. That is just starting to pick up. Korea, we have maintained particularly a combination of both white wood as well as Douglas fir markets, and it has basically tripled in the last year or so. They represent in total probably less than 15% of our total export volume going overseas at this time. But you know, the potential is there to do better going forward.

Would they be kind of a similar proportion of your income from export logs or is Japan still kind of disproportionate because of the high price of that Doug fir?

Well, you are right on that. A significant part of the volume that is going over to Korea is hemlock, which as you know if a lower-priced component than Douglas Fir.

Okay. The other question I had, and Dan, I understand it is a sensitive issue, but I think a lot of people would like to get some thoughts on the dividends. You are clearly not earning the dividend right now with the uncertain outlook for the housing market. Can you just share some general thoughts with us about how you think about the dividend?

Sure. I preface it, as I always do, that obviously it is a Board decision.

Absolutely.

As we look at the dividend, we commented on this in New York, we've got some guidance that we've provided in terms of long-term percentage of cash flow. We continue to look at that, and obviously our view is informed by what we may believe is the length and depth of the cycle. So we manage the dividend, you know, with a mind towards over-the-cycle earnings, and our Board continues to take that on a quarterly basis. We've had a significant inflow of cash here. We have the ability to pay that dividend but longer term, you know, that policy will continue to be reviewed, and it will be fundamentally based upon our view of long term earnings potential of the business.

Okay. Very good. Thank you.

Next question.

Our next question comes from Ross Gilardi with Merrill Lynch. Please go ahead.

Good morning. Thank you. A couple of months ago you guys had outlined the westwood shipping business as an asset where you were reviewing strategic alternatives. Can you just talk about that, and how you're thinking about that business in relation to some of the export opportunities to the Far East that you just mentioned, with regards to the Russian timber duties and so forth?

Sure. We really view them as two separate businesses. We are in the Timberlands business to the extent we have exports of logs. We may be shipping those on our own westwood ships, but we ship a fair amount on third-party carriers. So there's really no particular relationship to our shipping business and our exports. So westwood is a separate asset. We are going through a strategic review of the sales process of the entity, and anything we do with westwood will not impact our ability to continue to export.

Okay. Thank you. This is kind of a technical question; to the extent you can help me on the call it would be great. If not, we can handle it online. I was just confused that if you look at the Containerboard business, it looked like it was $105 million pretax during the quarter, yet your after-tax earnings from discontinued operations were $111 million. Can you just explain how that is, and perhaps a breakdown of your after-tax earnings from continuing - from discontinued ops by Containerboard versus the Australian operations?

That probably is something that we should take off line because it does depend upon the allocation of cost to the discontinued segments, so you get a little different treatment from a breakout of ongoing continuing versus just continuing.

Okay. Thank you.

We would be happy to give you more detail about that, as well as the break down between Containerboard and Australia.

We will be back later with Ross.

Thank you.

Our next question comes from Mark Weintraub with Buckingham Research. Please go ahead.

Thank you. Certainly I appreciate the dividend comes down to a Board decision, but can you share with us if you have actually reviewed the dividend with the Board since you made your comments at the mid-year investor presentations?

Hi, Mark. This is Patty. Yes, we have. As you noted, or would note, at the end of June we made the announcement to pay the dividend for the third quarter which will be paid here later in the month of August, and we won't have another decision on a dividend announcement until the fourth quarter.

Okay. And you also mentioned other alternative potential uses besides debt pay down, and again I understand that's something that is under review. Would that include things like share repurchase, or what are some of the alternatives that you could potentially share with us that would get reviewed?

Well, the Board will take all of that into consideration, Mark. You know, we have no Board authorization at this point for share buyback, but now that the transaction has been concluded, we have the opportunity to address, you know, the opportunities for utilization of that cash, and as Patty mentioned, priority number one is to pay down debt as it comes due, and then provide ourselves with some flexibility as we look forward.

Okay. And then if I can follow up a little bit on the mineral rights, for instance in DeSoto County, would you - I think you own about 15,000 or 20,000 acres there. Would you have already leased those properties or is that something that you, you have decision time to make and is it something that you would consider selling, for instance in the fashion that International Paper had announced a week or so ago or - and maybe take us through your thought process of the benefits of holding onto the properties, collecting royalties et cetera, as opposed to outright sales and what is, or has been at least until very recently, a hot market.

Sure. Mark, this is Tom. We don't have quite the number of acres you described to us in DeSoto Parish itself. We have a much smaller component inside of that, and a portion of those certainly are under these current leases. And, you know, as Dan mentioned in his remarks earlier, we continue to look at what are the best options, and in some cases that looks for a favorable lease arrangement that has a significant participation in the royalty stream, and we certainly will entertain options including either equity participation and/or a sale, if that is the best thing for the return to the shareholder.

Okay. And is there anyway that you will be able to over time perhaps provide us with parameters or help us better assess what the opportunities, the value opportunities in the mineral rights area might be?

I think we can provide some additional level of disclosure, certainly getting a sense from comments that people feel like we had not done so. We cannot get into any proprietary information. Obviously, valuation is driven significantly by prices of whatever those assets may be. Recently, we have seen a significant run run up in energy prices. That creates a different view of valuation. But the next time we get together we can share some more of that information, and try to give you a better sense and the rest of those on the call and our investors how we think through this.

You know, as I mentioned historically, you know, we have maintained and owned these mineral rights. We actively manage them. We do a lot of leasing. But we are not adverse to outright sale and/or joint venture. So we take all of that into consideration, and those decisions would be informed certainly by you know, values that, you know, not only we put on them but certainly others put on them.

Very helpful. Thank you. Just one real last quick one. Corporate was a plus 10 on Chart 13. I know you had mentioned something about foreign exchange gains and lower variable comp. On a go forward basis, what type of number should we be thinking about for corporate?

I think, Mark, on an ongoing basis, the corporate segment has been about - if you take out the abnormal pieces that we have looked at, around $40 million. So we are adjusting those numbers based on some of the right-sizing and restructuring, and we try and give you some additional clarity on that as we go forward.

Okay. Thank you.

Next question.

Our next question comes from Mark Connelly with Credit Suisse. Please go ahead.

Thank you. A very specific question, and then a more broad one. On the wood.

Mark, could you speak up a bit, please.

Can you hear me better?

That's better, Mark.

Thank you.

Sorry.

We can hear you.

Sorry about that. I am just wondering if you can give us a sense, within the wood products division you were able to narrow the loss, and I am wondering are there specific areas or regions where the losses are bigger or is - you know, is there anything still left to work on, you know, short of closing assets down?

My second question is more broadly, you know, you guys have had a pretty good read on the OSB business over the next - last couple of years, Steve Rogel was very cautious about all of the new capacity coming on, and I am curious now, do you see this business as, you know, ripe for consolidation over the next year or two, and how strategically important is that business to Weyerhaeuser, you know, on a long side or the short side?

Well, Mark, as you look at the material we saw significant improvement across our wood products businesses in the second quarter. We saw good response on the demand in some of our product lines. It was mixed in others, saw modest price improvements in lumber and OSB. We have continued, as we have talked on previous occasions, to have balanced our productive capability against what the demand signals are to us. In addition, we continue to work on the fundamentals in terms of taking costs out of our business in terms of spending, SG&A, staffing associated with some of our curtailments and shift [posture] changes, and so it is really a continuation of all of those efforts that accounted for what you saw in the second quarter.

Mark, in terms of your question about strategic importance, we are a significant player in the OSB business. It is a product that is included in our structural frame design that we market through our wood products, I-level solution. Primarily strategic asset in our wood products business continues to be our lumber business, because we believe that that adds value to our Timberlands position, especially in the South.

As we look at the other wood products that we manufacture, our engineered products, you know, we believe that they help to round out the solution. And at this point, you know, it is part of our strategic asset set. But we evaluate, you know, those businesses on an ongoing basis, and it is conceivable that, you know, some of that product could be outsourced, but we probably don't have the ability to make all of the OSB that we sell. But I think that that industry will likely go through some continued consolidation as we work through the current housing cycle. There have been a lot of mills that have been shut down and it is likely you will continue to see some changes in that industry.

That's very helpful. Thank you.

Next question.

Our next question comes from Steve Chercover with D.A. Davidson. Please go ahead.

Thanks, good morning. First question, Containerboard, previously you had a run rate of around $70 million in depreciation and it was $61 million in Q1. Is it right to say that had you included depreciation, we would have had around $45 million in operating earnings, so really it wasn't an improvement sequentially?

Yes, Steve, that would be correct. We had those earnings of about $45 million for the Q2.

Okay. So - all right. That's interesting. And also I see that SG&A is already down quite substantially. You know, that's before Containerboard was sold, and presumably before any material head count reduction at headquarters. Can you explain what is happening there?

We took some initiative last year to start to make some significant changes to SG&A. And I think we identified last year opportunities to drop that number by about $100 million. As we have embarked on the effort that I talked about this morning, where we identified a potential 375, that's primarily corporate staff. But as the market has slowed, our SG&A has come down in our operating businesses pretty significantly, as you might imagine, given the curtailments and shutdowns of mills in our wood products businesses, and in the decline in volume in our home building business. So it's a volume-related answer with respect to our businesses, but we have been addressing the indirect and the corporate support aspect as we have moved along.

So I think when I took out all the puts and takes on corporate side, it was $10 million worth of contribution. Are you guys now a profit center?

(Laughter)

Well, Mark if you - or Steve, if you look at the various pieces of the puts and takes, there are some rather abnormal pieces you really do have to sort out. We tried to give you some additional clarity on that as you look at the release, and also in the remarks. So, you know, you have some pension income in there. You have got the restructuring in Uruguay which, as Kathy mentioned, is really just a step up in the book basis as a result of the dissolution of our joint venture there. So I wouldn't say that our corporate center is a profit center, but we have been very focused on cutting costs in all areas that we can.

Great. Thanks, Patty. Thanks very much.

You bet.

Next question.

Next question is from Robert [Koort] with Goldman Sachs. Please go ahead.

Good morning. Thank you. A follow up on, I think it was Mark's question, on wood products, I think last quarter you had guided to expecting a lower operating loss in that segment. And I think you noted like modestly improving lumber prices and maybe lower costs, but a $70 million positive variance was actually, you know, appreciably lower, and I am wondering what specifically was better than what you expected?

I think we were pleasantly surprised by the improvement in pricing, particularly across our lumber and OSB during the quarter. As you can tell, volumes were basically overall a mix, so significant pricing, and we were actually seeing the full results. You know, year-over-year we have taken out $150 million in costs out of this business, as I mentioned, in terms of all of the activities we have been engaged upon. So we started to see some of the benefits from that as well.

Okay. And I guess just follow up to that, what is your actual operating rate right now? I know you mentioned it is 50% or so on OSB less than last year. What was the operating rate during the quarter on wood?

Again, if you go back I think we are saying - we haven't changed much since the material we presented at the May analysts meeting. We are about 70% in our lumber and 50, approximately ball park in OSB and our engineered products.

Okay. Then just on the real estate segment, what was your cancellation rate during the quarter?

I think it was just a little over 30%. It is on Chart 11.

Okay. Okay. Thank you. And then just lastly on pulp, I think you noted that about 15,000 tons or so you think you lost in volume because of the lack of access to containers. Do you expect that will continue going forward?

We certainly hope it doesn't but we have - this isn't the first time we have experienced a delay in shipments in this year. It is something that is high on our priority list to ensure that our shipments go out as planned and, again, we are working that issue diligently.

Okay. So in your guidance for next quarter, are you, you know, you think it will sort of correct? Or not be as bad?

Well, it is still a difficult situation, it is hard to speculate exactly how it will end up. Again, we are working it as best as we can, and it is certainly our intention not to have any future delays.

Okay. All right. Thanks very much, guys.

We have time for one last question.

Our final question comes from George Staphos with Banc of America Securities. Please go ahead.

Thanks. Hi, guys. Maybe a bigger picture question to conclude. You know, Dan, I think you mentioned at the beginning of the call that you now have the right portfolio to make the right decisions at the right time. I am paraphrasing a little bit here. As we should think about it, is the platform now appropriately sized, and we are merely waiting on the cycle as the catalyst for your next decisions within the portfolio, or do you need to perhaps even tack on to the portfolio before you make the next steps in Weyerhaeuser's evolution? Thanks.

Thanks, George. We can expect that there would continue to be some further fine-tuning of the portfolio as we continue to narrow down to our core assets. What we have talked about is that our fundamental foundation is built on our Timberlands. To that we add our wood products business, our cellulose fibers business and our real estate business. We have got other assets that we have had over the years, including some that we have, you know, recently sold such as Australia. We have talked about our shipping business and our railroads. So we have got some smaller noncore businesses where we still have an opportunity to fine-tune the portfolio.

As we look forward to '09 and '10, I mean we are really looking for some turnaround that we know will come in the housing cycle, which will give us some strength in our wood products business and our real estate business, it will give us some additional flexibility. Our focus is at this point to improve the operational excellence of every single business that we have. It will make it more valuable for us. Or ultimately, if we determine there was a better sponsor for any of those businesses, it would make those businesses more valuable.

Could the -

So - go ahead.

Could the fine-tuning include growing if you had the right valuation parameters or term parameters growing within the Timberlands business in a significant way?

It would absolutely include the potential to grow.

Okay. Thanks.

What we are trying to do is to narrow the focus on the portfolio, right-size the support organization that supports these businesses, to get on a solid footing for growth in the future. So we are going through this process of narrowing focus, you know, that we started with paper and now been through Containerboard. We have some smaller business activities. We will get to a solid core here, and then we will make a decision about the appropriate structures to support those businesses as we go forward.

Thank you very much.

Okay. That concludes the call. We appreciate all of the questions, and I just wanted to, you know, reiterate a couple of key points that we made. We have been through this downsizing process, especially with paper and containerboard. We are following that with our corporate restructuring that we know is necessary. I have been really excited about how quickly we have been able to address that issue, and you will start to see results, you know, already this year and then following through to next year.

You know, we have got a great leadership team. We are going to be positioned as we move forward. As we have talked, and Larry talked about the housing market, we expect the housing market is going to be tough for awhile. But we have gone through most of the downsizing in the businesses that participate in that industry, and I think as we come out of this we are going to be in good shape.

So the focus on '09 is to continue to squeeze costs to improve operational performance, creating flexibility and optionality for it as we move forward. We are expecting to see some market improvement end of '09 and into '10, so we are going to be positioned for it.

Thank you very much for your time and attention today. As always, if there are questions you can follow up with Kathy.

Thank you very much for joining. Have a good day.

Ladies and gentlemen, this concludes the Weyerhaeuser 2008 second quarter earnings conference call. If you would like to listen to a replay of today's conference call, please dial (800) 405-2236 or internationally at (303) 590-3000 and enter passcode 11116520 followed by the pound sign. Those numbers again are (800) 405-2236 or internationally at 303-490-3000 and enter passcode is 11116520 followed by the pound sign.

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